Dr Ikramul Haq
“Pakistan’s tax revenue remains very low relative to comparator developing countries and the tax effort expected for the country’s level of development. This reflects narrow tax bases, overgenerous tax concessions and exemptions, weak and fragmented revenue administrations, and structural features of the economy†— Unlocking Pakistan’s revenue potential, Ms Serhan Cevik, Country Report 16/2 (January 2016), IMF.
Last year, the Finance Minister and Federal Board of Revenue (FBR) were upbeat about exceeding the tax target. FBR was quick to issue a press release on July 5, 2016 that for fiscal year 2015-16, they “collected Rs 3130 billion, surpassing the target of Rs 3104 billionâ€. This ‘extraordinary’ feat was contested by many — from experts to ordinary people, from newspaper reporters to respectable editors. This year strangely, no such press release has been issued explaining as to why the FBR missed even the revised target of Rs 3521 billion for 2016-17. The original figure was Rs3621 billion.
There is no clarity about the amount actually collected by the FBR. Press reports suggest collection of approximately Rs 3410 billion that has purportedly irritated Ishaq Dar. According to a press report, he ‘grilled’ the taxmen for their poor performance, as expected figure was at least Rs 3421 billion. Like the earlier year, collection by FBR contains blocked refunds of over Rs 200 billon, advances from government-owned corporations of nearly Rs 100 billion, and about Rs 50 billion not due but extorted from oil and gas, telecommunication and banking companies. These advances will have dampening impact for coming months of current fiscal year, for which target of Rs 4013 billion has been fixed. Thus, sordid story of over-reporting of collection and overstating targets will continue. This is nothing but ‘fiscal gerrymandering’ that should be probed by the Standing Committees of Parliament on Revenue and Finance, Public Accounts Committee and the Auditor General of Pakistan as their constitutional obligation.
In 2015-16, FBR claimed to have collected Rs 1220 billion as income tax having a growth of 18.1 percent over the last year. The collection of sales tax in this period stood at Rs 1329 billion with a growth of 22.2 percent. Rs 404 billion was collected under the head of customs duty thereby giving an increase of over 30 percent. Federal Excise duty was collected to the tune of Rs 177 billion thus reflecting an increase of 9.1 percent over last year’s collection. Though the FBR and Ishaq Dar have been taking credit of “extraordinary performance†in revenue growth since 2013, the fact remains that staff of FBR collected just 8 percent to 10 percent of income tax through its own efforts.
It miserably failed to tax the rich and mighty and only levied a marginally higher withholding tax on non-filers that also hurt many who did not have taxable income. About 90 percent income tax came through withholding taxes or payments by way of advance under section 147 of the Income Tax Ordinance, 2001. Indirect taxes, namely, sales tax, customs duty, regulatory duty, excise duty (constituting 70 percent of total revenue) were collected/deposited by taxpayers/agents. FBR failed to counter massive tax evasion. The collection under these heads could have been doubled, if not more, with effective enforcement alone.
The dismal performance of FBR will also adversely affect the provinces as they are overwhelmingly dependent on collection by the centre that transfers to them from the divisible pool. Provinces are not ready to collect taxes due from the rich landowners and generate their own resources after establishment of local governments as envisaged under Article 140A of the constitution. Failure of FBR to meet the assigned target, what to speak of tapping the real tax potential which is not less than Rs 8 trillion, is going to lower the provinces’ respective shares though they made their budgets on what was projected and promised by Ishaq Dar.The biggest challenge faced by FBR is how to bridge the tax gap — its collection is one fourth of actual tax potential. Issues of documentation and tax compliance are lingering on for years even after completion of a costly $100 million World Bank funded Tax Reforms Administration Programme (TARP).
The only way to check massive evasion in customs, income tax and sales tax is implementing an integrated Tax Intelligence System, which is capable of recording, storing and cross-matching all inflows and outflows. All in-bound and out-bound containers should be scanned/x-rayed to check evasion of customs duties and taxes payable at source.
However, no reform agenda can succeed unless FBR is insulated from external political pressures. It should be made National Tax Authority (NTA) with an independent Board having 50 percent members from the public. Laws should be made by Parliament and collection of all federal and provincial taxes should be assigned to independent Board of Directors of NTA, selected by National Finance Commission and/or Council of Common Interests. It will facilitate taxpayers to approach a single agency and data sharing for all taxes will help increase revenues for the federation as well as the federating units.
